Use Fibonacci Retracement Tools and Make Your Trading Profitable One.

somrat4030

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What Is Fibonacci retracement?


What Is Fibonacci retracement?​


The Fibonacci retracement tool plots percentage retracement lines based upon the mathematical relationship within the Fibonacci sequence. These retracement levels provide support and resistance levels that can be used to target price objectives.

Fibonacci Retracements are displayed by first drawing a trend line between two extreme points. A series of six horizontal lines are drawn intersecting the trend line at the Fibonacci levels of 0.0%, 23.6%, 38.2%, 50%, 61.8%, and 100%.

How to calculate Fibonacci retracement

As these percentages are the same in every Fibonacci retracement tool, you don’t need to manually calculate anything. However, the way to get them is to start with the Fibonacci numbers.

Let’s create a sequence of numbers that starts with zero and one, and keep adding the sum of the two preceding numbers to the current one. If we continue this indefinitely, we get a number string that’s called the Fibonacci sequence.

Excluding the first few numbers, if you divide a number by the number that follows it, you’ll always get a ratio close to 0.618. For example, if you divide 21 by 34, you’ll get 0.6176. And if you divide a number by the number found two places to the right, you’ll get a ratio close to 0.382. For instance, if you divide 21 by 55, you’ll get 0.3818. All the ratios (except 50%) in the Fibonacci retracement tool are based on some calculations involving this method.

THE FIBONACCI SEQUENCE IN DAY TRADING

in the Fibonacci sequence, each number is a sum of the two numbers that precede it. As such, the sequence goes like this: 0, 1, 1, 2, 3, 5, 8…

The overall formula is Xn+2= Xn+1 + Xn.

By tweaking this formula, the Fibonacci retracement tool can be used in the markets to help in decision making to identify pivot points or areas that the price is likely to move to. This is more so useful in a trending market.

To use it, you don’t need to have any knowledge on how the Fibonacci sequence works.

What are Fibonacci retracement levels?

Fibonacci retracement levels are support and resistance levels that are based on the Fibonacci numbers. Those are 23.6%, 38.2%, 61.8% and 78.6%. When drawing Fibonacci levels, your trading software is likely to include the 50% level, even though it is not officially a Fibonacci retracement level.

Fibonacci Retracement + Support and Resistance

One of the best ways to use the Fibonacci retracement tool is to spot potential support and resistance levels and see if they line up with Fibonacci retracement levels.

If Fibonacci levels are already support and resistance levels, and you combine them with other price areas that a lot of other traders are watching, then the chances of price bouncing from those areas are much higher.

How to draw Fibonacci retracement levels​


There are some basic rules that need to be followed when drawing Fibonacci retracements, but there is also a certain degree of discretion present. It already starts with the point where you choose to measure the Fibo retracement. Two traders might get different results, based on what they identified as major low/high. Generally, it is easier to practice on the higher timeframe charts, before moving down to the hourly or minutes charts.

Step 1:

Identify the major high/low. Looking at the GBP/USD Daily chart below, it is obvious which two points we should connect.

Fibonacci retracement chart

Step 2:

Connect the two points (major high/low). In MT4, a trendline and the required Fibonacci levels will automatically appear.

Step 3:

Utilise the Fibonacci levels as support/resistance. A good example is the 61.8% retracement level which acted as major level of resistance on three occasions, and which the currency pair was unable to breach.

For getting more profitable strategy for your trading, you should join this forex trading forum.

Finding Fibonacci Retracements

In order to find and apply Fibonacci levels to the chart, you’ll need to identify Swing High and Swing Low points. Don’t worry- the process isn’t too involved. All you need is a previous price level relative to a periodic high and low:

*. A Swing High is a candlestick with at least two lower highs on both the left and right of itself.

*. A Swing Low is a candlestick with at least two higher lows on both the left and right of itself.

Pretty easy, right? Well, applying the Fibonacci retracement to your price chart isn’t much harder. Here are the basics:

*. For downtrends, click on the Swing High and drag the cursor to the most recent Swing Low.

*. For uptrends, click on the Swing Low and drag the cursor to the most recent Swing High.

As a result, the Fibonacci tool gives us a clear look at potential support or resistance levels.

How this indicator works​


*. The percentage retracements identify possible support or resistance areas, 23.6%, 38.2%, 50%, 61.8%, 100%. Applying these percentages to the difference between the high and low price for the period selected creates a set of price objectives.

*. Depending on the direction of the market, up or down, prices will often retrace a significant portion of the previous trend before resuming the move in the original direction.

*. These countertrend moves tend to fall into certain parameters, which are often the Fibonacci Retracement levels.

Basic Fibonacci Retracement Strategy

In an uptrend, buy when the price pulls back and stalls near one of the Fibonacci retracement levels, and then begins to move back to the upside. Place a stop loss just below the price low that was just created, or below the lower Fibonacci retracement level to give a bit more room. Ideally, the retracement level you buy at is one that the asset has a tendency to reverse at.

Look for some sort of trade trigger to occur near the Fibonacci level. For example, if the price is up and the price has pulled to near a key Fibo level, wait for the price to consolidate and then break out of that consolidation to the upside. This adds a second layer of confirmation. The Fibo level and then the price stalling and breaking higher. Engulfing patterns can also be watched for to trigger a trade. Without a trigger like this it will hard to trade Fibo levels on their own.

In a downtrend sell when the price pulls up and stalls near one of the Fibonacci retracement levels, and then begins to move back to the downside. Place a stop loss just above the price high that was just created, or above the higher Fibonacci retracement level to give a bit more room. Again, add in a trade trigger or some other element of confirmation.


Problems with Fibonacci Retracements in Trading

The main problem with Fibonacci Retracements levels is that quite often the price won’t stop at an exact level; it goes a little past, or reverses before a level. With so many levels drawn–23.6%, 38.2%, 50.0%, 61.8% and 78.6% (or 76.4%)–and then also realizing the price doesn’t usually reverse right at a level, saying that Fibonacci Retracements pick exact reversal points is wishful thinking. Price pretty much has to randomly reverse near one of these points simply because there are so many of them.

Bottom-line

Though Fibonacci is one of the useful methods to analyze your chart but it doesn’t provide an exact entry point rather an estimated area of entry.

Moreover, there is no guarantee that the price will reverse from any specified Fib level and hence you should combine it with other technical parameters as a confirmation.

You can learn more about forex trading profitable strategies and daily currency trading analysis at forum.forex

Thank You
 
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